Hong Kong Property:No reason to take it away

It’s all about P2P – Price to Policy

We believe the government is currently preoccupied with constitutional reform forLegislative Council discussion (17 June) and the grace period will soon be over withtheir focus returning to the residential segment. We expect more severe policies tocurb the property market if 1) price growth accelerates; and 2) there is no or aninsignificant US rate hike. Property prices have gone up 7.2% YTD on the back ofthe “wealth effect” from the stock market and have risen 13 months in a row. Therecent 7th round of mortgage tightening measures in February was the first time oftargeting genuine demand (first time home buyers and upgraders) by lowering theLTV ratio for apartments valued

Stock picks: Sun Hung Kai, Wheelock and Kerry Properties

SHKP is now our top pick based on the following criteria, followed by WHEE andKERR. We prefer developers with 1) higher mass market exposure in HK, 2)resilient rental growth and 3) good non-property exposure, which can avoid policyrisk. This should help them offset most of the market uncertainty. We removeCKOP from our top picks post restructuring as we believe its current share pricehas largely factored in the positives (YTD share price up 47%, versus sector up13%). SHKP should benefit from its strong growth in contract sales with marketleadership, a resilient rental portfolio and higher mass market exposure. While wesee WHEE being re-rated upwards from a pure holding conglomerate to one of thetop-5 HK developers, while KERR would benefit from its high exposure in China.

Developers preferring faster asset turnover

Most of the developers continue to adopt competitive pricing to increase assetturnover, in spite of positive newsflow in the market. The price differential hasremained at +/-5% between the primary and secondary market since 4Q13,versus 20-30% previously. We believe developers are less optimistic about themarket outlook now and prefer to secure profits through earlier presales tosecure profit and diversify the sales risk. Total saleable units rose from a troughof 52k in 3Q09 to 78k in 1Q15. Increased land supply and mid/small sizedevelopers coming to the market will be negative for major developers due tomore intense competition and margin pressure.

Shining on China exposure

We view the risk of cooling measures in China as close to nil and should remainso for most of 2016. In contrast, we expect more tightening in HK unlessproperty prices start to moderate. This should benefit HK developers with higherChina exposure. Developers with higher China exposure include K Wah (173HK, 56% GAV exposure), Kerry Properties (683 HK, 48%), New WorldDevelopment (17 HK, 27%) and CK Property (1113 HK, 27%).

Cautious on the sector despite fair valuation

We expect property prices to peak in 2015 and are cautious on the HK propertyoutlook, due to policy risks. The sector currently trades at 0.62x PB, 14.1x 2015EPE and 37% discount to NAV. We expect 5% drop in physical prices in 2015.